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COMMENTS & NOTES Unconscionability in Standard Forms COMMENTS & NOTES Unconscionability in Standard Forms Lewis A. Kornhausert This Comment argues that many exchanges governed by standard form contracts, though untainted by procedural defects and hence not currently subject to judicial control, may exhibit oppressive clauses or exorbitant prices. The sources of these market imperfections may be more amenable to legislative than judicial correction. "Practical men. are usually the slaves of some defunct econo- mist."1 With the legal profession this servitude has been to laissez-faire metaphors rather than nineteenth century economists. This Comment examines an area of daily conduct where the law's obeisance to dead doctrine has had significant impact: the enforceability of standard form agreements. In deciding whether to enforce a contract, courts generally focus not on the content of the exchange regulated by the contract between the individuals but only upon the manner of formation. They typically begin by asking, "Did the parties agree?," and elaborate by inquiring into the existence of offer and acceptance. Further investigation centers upon the competence of the parties, the presence or absence of duress, the accuracy, materiality, and nature of representations made during the negotiations leading to the contract, the presence or absence of a fidu- ciary relationship between the parties, and the existence of considera- tion.2 What the parties agreed to matters almost not at all; enforceabili- ty rests upon the process leading to agreement. t A.B. and M.A. 1972, Brown University; J.D. 1976, Boalt Hall School of Law, University of California, Berkeley. I gratefully acknowledge the assistance of Professors Melvin Eisenberg and Babette Barton of Boalt Hall School of Law, University of California, Berkeley, and of Ms. Evelyn Sinaiko. 1. J.M. KEYNEs, THE GENERAL THEORY OF EMPLOYMENT, INTEREsT AND MONEY 383 (Harbinger ed. 1964). 2. Courts sometimes speak of inadequacy of consideration. While this phrase hints at a concern for substantive matters it really masks an inquiry into the formation procedure similar to that involved under the unconscionability doctrine discussed in Part II infra. The early cases clearly considered inadequacy as an indication of fraud. McFadden v. Mitchell, 54 Cal. 628, 202 P. 479 (1,880) (failure of consideration not itself enough to justify finding fraud as a matter of law). More recently, courts state that consideration will not be measured if it is "plainly substantial." Blocksidge v. Broadway Sixth Co., 207 Cal. App. 2d 628, 24 Cal. Rptr. 622 (1962), citing in support 1151 1152 CALIFORNIA LAW REVIEW [Vol. 64:1151 This Comment argues that exchanges untainted by failures in the bargaining process can suffer from the same types of oppression- exorbitant prices and unfair clauses--which beset contracts struck down by the courts under the traditional bargaining analysis. A comparison of the economic models which underlie present legal doctrines with more contemporary models that better capture market realities reveals that a new approach to the concept of "unconscionability" is required. Under it, legislative action may more easily remedy market flaws than courts. Before outlining the economic models on which the analysis of exchanges ought to be based, this Comment will examine the theoretical basis for present legal doctrines. I ECONOMIC MODELS OF CONTRACT LAW The notion of contract as a bargaining process arose concomitantly with the doctrines of laissez-faire and of the free enterprise system. Responsibility for these doctrines has commonly been foisted upon the nineteenth century economists.3 In the laissez-faire market place, eco- of the "plainly substantial" language, Taylor v. Taylor, 66 Cal. App. 2d 690, 698 (1944), which states that inadequacy evidences fraud or undue influence. 3. The text equivocates on the responsibility of economists for the vigorous, often cutthroat image of laissez-faire because the demon haunting the legal profession may not be a defunct economist but an outdated myth. Two distinct accounts of nineteenth century economics exist. Legal scholars have asserted the link between laissez-faire and economic theory. G. GILMORE, THE DEATH OF CoNwmAcr 6-7 (1974) cites L. Fan- mAN, CoNTRxcr LAw iN AMERICA (1965) in support of his contention that contract theory's individualism is linked to nineteenth century economic theory. Friedman notes that "[the law of contract is, therefore, roughly coextensive with the free market. Liberal nineteenth-century economics fits in neatly with the law of contracts so viewed." Id. at 20. Friedman cites no authority for his view of nineteenth century liberal economic theory, however, and the treatment of parties as individual units with complete mobility and freedom of decision does not necessarily imply an institutional arrangement such as contract law. Twentieth century historians of economic thought emphasize the market aspects, as opposed to the bargaining aspects of nineteenth century economic theory. See, e.g., R. LEKACmHAN, A HImORY OF ECONOMIC IDnAS 136-48 (1959) (on Ricardo and Mill). While these modem accounts cite the original sources, the twentieth century historians may have recast prior theory in light of today's notions of economics which do not fol- low the laissez-faire version. The confusion may arise from the nineteenth century theorist's tendency to illustrate his arguments with examples that lend credence to the laissez-faire notion without actually adopting the position. See, e.g., J. CuARNEs, SOME LamINa PwrCIPLEs OF POLmcAL ECONOMY 106-07 (1874) (market forces establish a narrow range from which the exact price is determined through the "higgling of the market"); Ingram, Political Economy, in 19 ENCYCLOPAEDIA BnrrINmcA 346, 373 (Twentieth Century ed. 1902) (Ricardo's hypothetical examples imagine "two contract- ing savages"); Veblen, Preconceptions of Economic Science 111, 14 QJ. ECON. 240, 257-60 (1900). Another strain of twentieth century economics, game theory, appears to emphasize the negotiation aspect of economic activity. However, it shares the concern of the more classical models, described in text accompanying notes 91-114 infra, for the information 1976] UNCONSCIONABILITY 1153 nomic agents, unfettered by government restrictions, interacted freely. Agents met, conferred, and, acting in their own self-interest, contract- ed.4 The attribution of laissez-faire to the economists may have resulted from the coincidence of the vocabularies of the nineteenth century economist and his contemporary, the social darwinist. 5 The language of vigorous competition and of survival of the fittest masked the econo- mists' concern for static equilibria6 and for the conditions which marked them;' the predominant economic question was what price equated supply and demand in an unchanging world, not how that price was reached or how it changed over time. In any case, freedom of contract, "the inevitable counterpart of a free enterprise system,"8 arose from this laissez-faire context. Under the influence of Langdell, Holmes, and Williston, contract law evolved into a law of formalities which, if correctly followed, resulted in a legally binding agreement.' Contract law did not, and largely does not, exam- ine the contents of the agreement but merely the manner of formation."0 When the state wished to regulate the substantive contents of the agree- ment it looked to a substantive area of law: the law merchant, insurance law, or labor law."' Actual market behavior increasingly has exhibited deviations from the presuppositions of contract law. This has not gone unrecognized by the legal profession. From Karl Llewellyn,12 Friedrich Kessler,1 3 and more recent commentators,' 4 lawyers have understood that a growing structures of the market. These structures form one part of the definition of the game. In addition, most game theoretic models look at solutions concepts designed to reveal the characteristics of the final outcome and not the process of reaching it. Yet this process is the heart of contract theory. This Comment's exclusion of game theoretic models, then, does not alter its conclusion. See generally R. LuCE & H. RAIFFA, GAMES AND DECISIO S (1957). 4. See L. FRiEDMAN, CONTACer LAv IN AMEmRcA 20-21 (1965). 5. See R. HOFSTADTER, SocrAL DARWnISM IN AMUCncAN Touoirr 143-56 (rev. ed. 1955). 6. The concept of "static equilibrium" contemplates an abstract balance in the market. "Static" refers to the unchanging nature of the environment in which prices occur; "equilibrium" refers to the compatibility of agents' decisions. See text accom- panying notes 75-76 infra. 7. See R. HOFSTATmR, SOCIAL DARWINIsM IN AMERICAN THOuGHT 143-56 (rev. ed. 1955); Veblen, Preconceptions of Economic Science I1, 14 QJ. EcoN. 240, 265-68 (1900). 8. Kessler, Contracts of Adhesion--Some Thoughts About Freedom of Contract, 43 COLuM. L. REv. 629, 630 (1943). 9. See G. GILMOR, THE DEATH OF CoNTRACTr13-34 (1974). 10. See id. at 21. 11. Cf. L. FRImDMAN, CONTRACT LAW IN AMEICA 20-24 (1965). 12. Llewellyn, Book Review, 52 HARv. L. Rv. 700 ('1939). 13. Kessler, Contracts of Adhesion-Some Thoughts About Freedom of Contract, 43 COLUM. L REv. 629 (1943). 14. See, e.g., Slawson, Standard Form Contracts and Democratic Control of Lawmaking Power, 84 HARv. L. Rv. 529 (1971) [hereinafter cited as Slawson]. 1154 CALIFORNIA LAW REVIEW [Vol. 64:1151 proportion of agreements---one commentator has said 99 percent of all agreements'---do not conform to the patterns of interaction, dickering and other bargaining required by contract
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